Q4 2020 Innospec Inc Earnings Call
And based on Unfortunately, there'll be followed the Lake, Washington, and Nachos box on lots of Washington, Although the all day.
What kind of a star one on your telephone please be advised the call's being recorded and although that's wonderful.
Speaker.
David we don't.
Hello, This is <unk>.
David Jones, and on Inspector General Counsel, and Chief compliance Officer late yesterday, we reported our financial results for the fourth quarter and full year 'twenty 'twenty.
The earnings release in this presentation are posted on the company side.
Nick Dot com and moving will be available on the site for at least six months.
During this call we will be making forward looking statements, which are predictions projections or other statements about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties.
These statements involve a number of risks uncertainties and assumptions, including the effects of the COVID-19 pandemic.
So it just gets duration is long term economic impact measures taken by government authorities to address it in a manner, which the pandemic may precipitate exacerbate other risks and uncertainties that could cause actual results to differ materially from the anticipated results implied by forward looking statements.
These risks and uncertainties are detailed in our SEC 10-K, 10, Qs and other filings with the SEC.
Actually the FTC sites or aspects site for these and other documents.
In our discussions today. We've also included some non-GAAP financial measures a reconciliation to the most directly comparable GAAP financial measures is contained in our earnings release, a copy of that is available on <unk> site.
With us today from minutes back are Patrick Williams, President and Chief Executive Officer, and Dean Clemenson Executive Vice President and Chief Financial Officer.
Turning over to you Patrick.
Thank you, David and welcome everyone to inspect fourth quarter and full year 2020 conference call.
Throughout the incredible challenges of 2020.
You'd expect team has done a phenomenal job of maintaining the health and safety of our operations, while staying focused on consistently meeting our customers' requirements.
Our continued focus on gross margins cost control and cash flow has underpinned a significant turnaround in our results since the second quarter.
The performance chemicals team performed well throughout 2020, delivering its third consecutive year of operating income growth margin expansion and increased cash flow from operations.
Full year operating income was up an impressive 13% over 2019.
We are investing in additional global R&D capabilities, such as our new state of the Art Technology Center in North Carolina, which will advance customer collaboration in key growth markets, including personal care home care agriculture and construction.
In addition, this quarter, we added manufacturing capacity and new railcar handling facilities in North Carolina to support growing demand for our innovative industry, leading mild surfactants.
We will continue investing to support the long term growth of this business and bring to market. The large pipeline of technology focused organic growth opportunities.
In fuel specialties global fuel consumption grew for the second consecutive quarter, resulting in a 15% sequential increase in sales and operating income.
Exiting 2020 average fuel demand on our key markets that we serve was still below 2019 levels and as expected the recovery in aviation has lagged that a road fuel.
As the vaccine rollout advances and barring any further sustained economic lockdowns.
For our fuel outlets should improve along with fuel consumption.
Fuel economy and emissions reduction have never been more important.
Our products boost the performance of cleaner fuels, such as low sulfur marine and renewable diesel.
<unk> miles per gallon and reduces emissions.
Our industry, leading technology will remain fundamental enabling the world's transportation fleets to keep pace with increased regulatory performance and sustainability standards.
In our most impacted business oilfield specialties, we reacted quickly to reset the cost structure. Following the unprecedented second quarter drop in global oil demand.
Sequential sales improved 34 per cent and we delivered positive operating income in line with the upper end of the expectations noted on our third quarter earnings call.
This marks a substantial improvement from the $12 $4 million loss in the second quarter.
Oil prices have settled above $50 recently as OPEC, plus supply actions and an improving global oil demand outlook had been supportive of customer activity levels.
Our expectation on our completions business in the U S. E&P companies will continue to increase activity in a disciplined fashion in 2021.
As they look to balance production with cash flow.
Another oilfield segments, including production D. R E in the Middle East.
Assuming stable oil prices at current levels. Our outlook is for continued sequential growth throughout 2021.
Our leading technology and exceptional service.
<unk> us to grow faster than the broader market as the recovery accelerates.
In addition, the actions that we took in 2020 to restructure our cost base will continue to deliver operating leverage improvements as the recovery continues.
Now I will turn the call over to Ian Clemenson, who will review our financial results in more detail.
Then I will return with some concluding comments after that we will take your questions.
Thanks, Patrick.
Turning to slide eight in the presentation. The Companys total revenues for the fourth quarter with $310 8 million.
20% decrease from $397 million a year ago.
And by reduced customer activity in oilfield services and lower demand due to the pandemic in fuel specialties.
<unk> gross margin decreased slightly by one percentage point from last year to 29, 3%.
EBITDA for the quarter was $40 2 million compared to $55 2 million last year and net.
Net income for the quarter was $23 6 million compared to $31 1 million last year.
Our GAAP earnings per share were 91, Inc.
Special items, the net effect of which decreased our fourth quarter earnings by <unk> 36 per share.
A year ago, we reported GAAP earnings of $1 26 per share, which included a negative impact from special items of 21 cents.
Excluding special items in both years, our adjusted EPS for the quarter was $1 27 compared to $1 47.
A year ago.
For the full year total revenues of $1 3 billion decreased 21% from $1 5 billion in 2019 again, driven by reduced customer activity in oilfield services on a lower demand in fuel specialties due to the pandemic.
EBITDA for the year.
With $108 9 million compared to $201 8 million in 2019.
Net income was $28 7 million compared to $112 2 million a year ago.
Our full year GAAP earnings per share were $1.16, including special items, which decreased our full year earnings by $2 six per share.
In 2019, we reported GAAP earnings of $4 54 per share, which includes a negative impact from special items of 68 cents.
Excluding special items in both years, our adjusted EPS for the year was $3 22.
Pat to $5 22, a year ago.
Moving on to slide nine revenues in field specialties for the fourth quarter were 138 3 million.
8% lower than the $153 million reported a year ago.
Volumes were down by 1% and there was a negative price mix effects on 8% offsetting a 1% positive currency impact.
Fuel specialties gross margin for the quarter was at the lower end of our expected range of 31 four per cent compared to 33, 3% in the same quarter in 2019 due to a weaker sales mix.
Operating income for the segment was $25 5 million down 11% from a year ago.
For the full year fuel specialties revenues were down 12% to five and from $12 7 million on operating income was $84 5 million compared to $116 6 million in 2019.
Fuel demand has continued to improve sequentially from the second quarter low points and subject to any sustained economic lockdowns demand for off you're allowed to chase should improve along with fuel consumption in 2021.
Turning to slide 10 revenue performance chemicals for the fourth quarter were $114 6 million on pay per cent from last year's $106 million as an increase in volumes of 10% on a positive currency impact of 4%.
That's an adverse price mix of 6%.
Gross margins of 23, 8% was down 1%, one six percentage points compared to a strong 25 four percentage of the same quarter in 2019.
Operating income was slightly down by 2% from last year at $14 6 million.
For the full year revenues of phone from $25 $4 million were broadly similar to $428 7 million in 2019.
On operating income increased by 13% to $54 8 million.
We believe our performance chemicals business can sustain mid to high single digit revenue growth into 2021, reflecting the strong pipeline of organic organic growth opportunities we have.
Moving on to slide 11 revenues in oilfield services for the fourth quarter were $57 9 million down 52% on the fourth quarter of 2019, driven by low levels of customer activity in U S completions.
Gross margin of 35, 1% growth three seven percentage points on last year's $32 four per cent.
Operating income of no point 2 million was down from $11 8 million in the same quarter last year.
<unk> seen a strong sequential improvement over the third quarter and reached a breakeven operating income.
Further improvements expected in 2021.
For the full year revenues were $255 million down 47% from $479 9 million a year ago.
This translated into an operating loss of $9 5 million compared to an operating income of $39 7 million in 2019.
Turning to slide 12, corporate costs of $10 7 million were down $1 9 million from last year, primarily driven by lower personnel related accruals, partially offset by expenses related to our ongoing M&A efforts.
The full year adjusted effective tax rate was $23 five per cent compared to 22, 6% last year and increased slightly as a greater proportion of our profits are now being in higher tax jurisdictions.
For 2021, we expect the full year effective tax rate to be approximately 25%.
Moving on to Slide 13. This was another excellent quarter free cash with net cash generated from operations of $58 2 million before capital expenditures of $8 million.
In the quarter, we paid the previously announced semiannual dividend of 52 cents per common share.
This brought the total dividend for the full year to $1.04 per share a slight increase over 2019.
For the full year net cash from operations was $145 9 million compared to $161 6 million during 2019.
As of December 31, 2020, and spec out of $105 3 million in cash and cash equivalents and finance lease debt no point $6 million, resulting in a net cash position of $104 7 million compared to a net cash position of $15 6 million a year ago.
And now I'll turn the call back over to Patrick for some final comments.
Thanks Ian.
Despite current virus case levels and regional Lockdowns, which are adding some uncertainty to the exact timing and trajectory of the continued recovery.
We expect the year with strong momentum.
As demand in many of our end markets continues to improve from the low point of the second quarter.
In performance chemicals, the pandemic has accelerated customer focus on the secular trends that are technologies address including less packaging and more mild natural ingredients.
This has created opportunities to pull forward organic growth investments.
Aligned with customer demand.
While activity is still below pre pandemic levels in fuel specialties in oilfield services.
Both are well positioned for further improvement as the global economy progresses, along the path to full reopening.
We continue to generate excellent cash flow and further strengthen our balance sheet.
We are seeing the potential to full pull forward and increase new organic growth investments in all our businesses.
In parallel we continue to evaluate acquisitions, which would add meaningful shareholder value.
This quarter, we have incurred some significant deal cost as we have been appraised and some interesting opportunities we.
We have nothing further to report.
And remain hopeful we can make progress, but we'll remain disciplined in our approach.
We're looking forward to 2021 nude optimism.
Since March last year, we've been doing with exceptional and unprecedented challenges.
And I've been very proud on the which way do you expect team has responded.
We've entered 2021 with improved market conditions.
Very strong balance sheet, and an exciting portfolio of both organic and acquisitive growth opportunities.
Now I will turn the call over to the operator, and you know I will take your questions.
Thank you didn't hang up on.
On that will now begin the question and answer session.
At this time, if he likes to ask a question. Please press star one on your telephone keypad recurring income.
Concept requests I need price attachment once again I'm wondering if you have any questions.
First question, it's from the line of John on one thing.
C J F.
Yeah.
Everyone. Thank you for taking my questions and very nice quarter.
Thanks, John maybe Mike maybe my first one is just what was the mix headwind in fuels and how do you expect that to trend as we go forward is it mostly aviation or was there something else that we should be thinking about there.
Yeah, John there's a lot of it was aviation.
But <unk> had a decent quarter, because obviously, it's a private aircraft and in crop dusting et cetera, so that that had a decent quarter, but it was mostly commercial aviation and you're still you still have a slow.
But steady progress and in an improving economy, which obviously you're gonna be burning more fuel so it's a little bit of everything.
That really constitute a little bit of headwinds, but we're starting to see that demand definitely come back.
Got it Okay, and then Patrick could you talk about the outlook for oilfield demand and profitability heading into the year. It looks like you had a much better Q4, obviously price to keep rising I assume the demand for fuels rides on the vaccinations.
At what revenue level do you think you can you can hit maybe 2019 levels of profitability or if youre not going to get there you know what's the picture is as you head into the year on your kind of what you're expecting from.
Right right until the net.
Yes, I mean, we're you know we're extremely optimistic.
On oilfield.
I think it's gonna be a little slower recovery.
Than years in the past I think that you're not having a lot of private equity chasing P companies I think theres more focus on cash flow and paying down debt.
So theres not a lot of new working capital coming back into the market on.
So to me it's.
That's beneficial to this market globally.
And I think it's going to be a slower more controlled Ricky.
Recovery, we're starting to see it we feel extremely positive about the year.
No and you might want to comment on where you think numbers are going but from a from a positive standpoint with on the from the from looking at the global markets and what we're seeing in the U S shale markets as well.
We're extremely excited about 'twenty 'twenty, one and I think you'll see a positive operating income moving forward throughout the year.
And any additional government yeah, just tried a couple of points Patrick.
We are way off John the $482 million of revenue that we generated in 2019.
On the way we feel about 2021 as you know we're in a good spot we've got great technology renewal day right fields.
People are primed and ready to go on we just need that customer activity.
Moving on oil prices to stay high and that's going to evolve over the year as vaccination relative without economic Lockdowns are lifted that's all going to help but we are running towards that run rate, but we're not going to hit that in 2021.
That was much more of a 2022 targets.
Okay, Great and then just from a seasonal perspective Q4 is usually a high point for you was the cold flow sales shall we be expecting the same level of seasonal step down as we head into Q1.
Or is there a reason to think that there could be sequential improvement just giving how demand has improved.
I think you'll start seeing a little bit of improvement.
Being that you just said as demand has started to come back.
And I think as well youre starting to see the cold snaps common.
That will benefit definitely Q1.
So we should have a higher margin product.
Our balance.
Throughout that portfolio on fuel specialties, which should help Q1.
Okay, Great and then just last one for me any update on on the newer products that maybe got a little bit delayed by the pandemic. The IMO 2020 stumpage Udi.
Efforts, just any update on those as we head into the year.
You know still slow I'm still a little delayed due to the pandemic.
But we'll start to see activity come back I would probably say mid year is as we see some of these lockdowns and the vaccines it out to the mouth market.
We should start seeing some of these more product movement in that area.
Okay great.
Really no change right.
No change as of right now that's correct.
Okay. Thanks, Patrick appreciate it.
Thank you.
Thank you. Our next question that's on the line of David Silver you May ask a question.
Yeah, Hi, good morning.
Good morning day.
Yeah. Thanks.
I have you know kind of a handful of questions.
I think maybe just to start just for Ian.
You know when you were calling out your except exceptional items. This quarter special items. The first one was a $4 2 million of I think it was.
<unk> referred to as acquisition related costs. So.
Was just curious you know I wasn't aware of you know.
Current acquisition activity, but I'm, just wondering if that way.
A contingent payment from the huntsman deal or what might that referred to.
Yeah. So David what we are what we started the early remarks was that these are the costs of our ongoing.
Efforts to identify and diligence acquisition targets.
On the expenses for the quarter.
Fairly material.
Hopefully that will progress further with these targets and these opportunities, but we're going to stay disciplined in our approach so.
Do you need to think about these costs as the cost of diligence and doing our homework on the targets.
Okay got additional color to that David is that these are not going to be ongoing cost.
Right. Okay. Thank you for that.
Patrick I had a question on the oilfield services or even a couple of questions, but three months ago. I think I asked you kind of where do you think that the inflection point is or where is that.
The point in the price of crude, let's say domestically where.
The the call or the demand for for years products and services really starts to you know a risk.
Respond.
And and you know what.
We've had I think I think our when we spoke three months ago. The price of crude was maybe in the high thirties.
And most recently, it's touched 60, I guess W. T I.
But you know during the something happened or there was a trigger point for the typical shale based on producer.
During the fourth quarter could you just highlight where you think that is was it low forty's mid Forty's, where where do you think you know the the.
The inflection point was.
Yeah, I mean, if you look at all the basins that are all a little bit different than what the inflection point right now.
Net costs are.
They all have the variable to them and I think every company has a little variable to them as well.
But you're probably right when you start to get into that the forties Mark.
Mid Forty's and beyond you definitely start seeing more activity and more profitability within the E&P companies.
So we have seen the activity levels increase.
Well the general market is seeing activity levels increase.
I think the issue there David is that unlike some of the recoveries in the past, where you had a lot of capital flow into the market. It's a little more disciplined approach right now you know.
Cause being that the pandemic is still out there so full on demand is not on board.
No I think not a lot of people are chasing it they want to make sure that they're still sustainability of these prices aren't going all of a sudden drop down to the low thirties again.
So you're seeing growth and I think it's a responsible growth right now.
And sustainable which we like.
So I think youll see a consistently improved throughout the year and I think you'll see our oilfield services business consistently improved brought along with it and we should outgrow that improvement just due to the fact that we've typically outgrow the market.
So we're in a solid spot and I think with crude prices as you said.
No touch on 60 as long as this isn't a short term blip on.
It should be a very healthy year for oilfield specialties.
Okay, Great and I'm, just going to follow up on another comment or another distinction you called out.
Three months ago regarding oilfield services demand was kind of a distinction you drew between customers.
[noise] seeking your bundle you know a bundle of your products and services relative to maybe you know due to the price of crude or profitability opportunities. You know they were maybe shopping a little bit more I, dunno, Ala carte or individual products and services.
Do you think has that are noticeably changed I mean is the fourth was the fourth quarter kind of for lack of a better term more of our a la carte.
On a pick up and could we see maybe a stronger pickup as profitability returns and people you know.
Seek your full suite of services to some sort of characterizing the appetite for for your portfolio. Thank you.
Sure, it's a little bit of the opposite where actually the D bundled approach.
Just due to the fact that we are specialty chemical suppliers of technology, we don't supply the horsepower.
And so our approach is if you want the best price emulation, where if you want the best production of out of your wells or you want the best throughput through your pipeline.
Our chemicals, and our specialty chemicals, and our group of technicians, all the people to us we're not the providers of horsepower, that's not who we are as a company.
So I think this approach.
Giving the customer throughout Q4 and throughout 2021 will stay on target.
Giving that customer the best product at the best price.
Those basins.
And so it's a continued strategy that we've had with them.
You need to upgrade our technology portfolio as you see we have DRA in the portfolio now as well.
And we felt like that that's the best service you can give to your customer is being the you know the protection that we provide on the chemical structure standpoint.
So it's been a benefit to us it's been a benefit to our customers on Wednesday on that track.
Okay. Thank you and then maybe one more here and this would be referring to maybe the near to medium term outlook, let's say one to three quarters and I'm going to focus on.
The fuel specialties segment.
And ultimately this is a question Patrick about Europe versus let's say North America or other regions.
You know my sense is that.
Whether it's the pandemic or just overall economic activity I mean, Europe is off to a slower start on the recovery path or the trajectory of their recovery relative to.
North America, or the global market as a whole.
And I'm wondering you know whether that might you know, we should kind of temper our optimism a little bit.
Maybe for the next couple of quarters thinking about the recovery the trajectory of the recovery in your fuel specialties unit, whether it's top line or maybe there was some of the mix effects that seem to be.
So prevalent in the current quarter, but maybe just a comment on how fuel specialties is going to respond.
If the current pace of European economic recovery pandemic post pandemic.
FX or business conditions doesn't doesn't resume quite as quickly as elsewhere. Thank you shneur yeah.
You know it's.
It's all about fuel consumption and as fuel consumption rises.
Our fuel specialties business will rise right along with it.
It's not a business where we have.
You know heavy tend on the ground.
It's a very flexible business.
It's not a business that youre going to take a lot of cost out.
As you can see it kicks out a hell of a lot of free cash flow and that's the beauty about this business. It is strictly as fuel consumption comes back.
This business comes back right along with it and you are correct it with along with the pandemic and the different variants that are out there.
On the U K and specific in parts of Europe.
You know are having a struggle coming back as quickly as the U S Inc.
But I think as the vaccination gets out and.
More on Society and you you almost get to a herd immunity you will see demand come back and I think youll see it come back quite significantly now probably not in the first quarter.
But we see go into the second and third quarter, you know Theres a lot of people that are that have been pent up that haven't been able to travel whether it's going on vacation whether its business travel whether it's you know it.
All kinds of different cargo that's been tied up.
I think youll see a lot of that release as a vaccine comes out and you start getting herd immunity. So.
Our view is it's probably going to come back quicker than a lot of people think but obviously, we tempered as well because we watch the fuel consumption.
Well, we see that start ticking up quite significantly we put the brakes on but it's still you know you've seen it quarter over quarter, it's starting to come back in and we're still pretty optimistic.
Okay.
Okay, I do have one or two more but I think I'm gonna go back in queue, but yeah.
Anyway I'll just go back in queue. Okay. Thanks, a lot guys.
Thanks.
Thank you we'll take our next question it's from the line of Mr. Shaw You May ask your question.
And if you will.
This is especially volume as I thought were very good I guess to me they were outpacing the market.
Benefit at all on anything like this is a question for any of your businesses, but.
Hey, what what was that attributable to <unk> was there any benefit from sort of Brexit you know ended the year or you know moving stuff over borders I know you have a decent U K presence. So I was just curious what the sort of the strength in volumes in fuel specialties was attributable to.
No Chris It was really just I you know I think during the pandemic.
Obviously, you saw volume drop off quite consistently and I think what happened is they used up the current inventories that were sitting on.
You know at their locations at that time.
Because you started to see consumption come back you know the demand for our products came back quite significantly so it wasn't necessarily one thing it wasn't Brexit.
It wasn't you know the market getting cold across Europe, or the U S. There was not anything we in specific we can point to with the exception that we think there was a big draw down during the pandemic.
And then as soon as the market started coming back there was a lot of orders that came in.
So we think that that was more so than than than any one specific product one outpacing the other.
Okay got it thanks, and then in oilfield.
Being showing profits at the level of sales yet on a quarter I think very you know the great achievements of the question was how much of the you know you definitely get a lot of costs and how much of that is variable how much does it cause you know does it come back when volumes come back are you, giving any insight into that.
Yeah, Ian do you want to pick that up and then I'll add some color at the end of it.
So probably the way to think about it Chris is that most of our costs down to gross profit and in that total cost of sales line most of that is pretty variable.
Mostly raw material costs.
People that we have out on that.
At the wellhead.
It goes up and down with activity levels.
And they say all on.
On.
A little bit more fixed cost in that because what we've been very keen to do is retain the quality of the staff in this business. So that when the return on the business starts to grow again that we've got the right people in place sexual its full advantage of that so the real variability.
Cost of goods on not as much.
I say, all I know that those go up and down.
It depends on activity.
That's probably less valuable in the Cogs on if that helps.
Yep.
So I guess theres definitely some leverage that obviously then what volumes do come back that's I guess, what I was getting at the ultimate like yes, no doubt about.
Okay.
Alright and performance capped the just doesn't that margin mix you were talking about.
What what happened was it last year what is the what products are we talking about you know.
And the last reason was very strong margin this year that sounds like a price mix issue or a mix issue that was different than what what what products. We talked about were more prevalent last year less prevalent.
The impact that mix that way.
Yes.
Things really Chris I mean first of all in Q4 2019.
We're building inventory ahead of a launch of a new product so our manufacturing sites running absolutely flat out so on.
The manufacturing variances.
Very highly positive.
We didn't have that same demand on our manufacturing facilities this year.
There was also a little bit of mix towards lower margin.
Business as well now.
This is comparing a really strong quarter in Q4 'twenty against a really strong quarter Q4, 19. So yeah, there's no longer to emission you say, we are really pleased with both quarters.
Look at the margin improvement that we've delivered over the last two or three years in this business, it's been pretty spectacular so.
In great shape and were not overly concerned by a small dip year over year.
It was the it was the start up this quarter of the the new net capacity and also I guess, the rail rail loading yard or something but what does that does that have an impact at all on the cost side for the for Q.
No in the fourth quarter, we'll start to see the benefits coming through in the first quarter 'twenty 'twenty 'twenty one won't be on.
All right got it thanks a lot.
Chris Thank you thanks, Craig.
Thank you we will take on.
Mr. John on <unk>.
One thing question. Thank.
Thank you.
Hi, Yes, I just wanted to follow up on us on some of the SCR commentary on Opex as we go forward is Q4 the amount you spend in Q4 on it from an Opex perspective.
Representative of what we should be thinking that Q1 and kind of.
As a baseline for outer years progressive depending on growth.
They're kind of exceptional items that maybe won't be repeating as we get into the next year.
Joe Jon There's obviously you know a little bit a few puts and takes in Q4 as we balance stops on the compensation accruals with some of the acquisition costs at the corporate level that actually balance itself out quite nicely.
No doubt within our business isn't moving.
Chemicals fuels on the oilfield.
But in light of cost in Q4, partly because we're not traveling partly because the activity levels just on as high and some of that balance and get compensation accruals as well.
Look forward.
Into 2020, well you know our hope and expectation is that we start to see a much better activity levels on.
And our feeling is that we will see the oxygen level. So we will need to put more cash they are into the into the system. So we would expect for the full year on say hours about $268 million, we would expect to be higher than that probably closer to two five maybe even two nine and see if things go well.
And that will grow with the business as we as we move through the year on the.
The economies open up on Lockdowns are lifted.
Okay, great. Thanks for that color and then just to follow up on on the prior question about the spending on due diligence I mean.
If you're spending a significant amount of it I assume that you are pretty far down.
Pat can you just give us a preview of what looking at interesting and attractive from a end market perspective.
Yeah.
Hum.
And what valuations are looking like out there.
Yeah, I mean, as you know we can't say much about what we're doing.
You know kind of what we've put into the colors, what we've what we can say, but what we can say further.
Is that the businesses that we're looking for M&A activity is in the performance chemical sector.
Around our tech based around our technology that could give it adjacent markets are adjacent technologies as well.
So it's really that's our focus from the M&A side.
We're consistently looking at deals valuations are fairly high on that market.
You've got Spacs Chase net you've got you've.
So you've got a lot of private equity money.
Chase in this market and when they when they chased oilfield for a long time and it struggled they went right back into.
Performance chemicals like segments.
So the valuations are pretty high and as you know we're very cautious in.
With our balance sheet I'm very cautious on what kind of multiple we pay but.
We're not afraid to go out or something if we know the benefit of that not only short term deleverage, but the benefit long term for our business. We're not afraid to go after a little higher multiple we're just not going to pay you know on the teens like we've seen in the past.
We've seen a lot of companies do that.
And then obviously when we had this pandemic hit and we had a market slowdown.
You had a lot of companies struggle on we're not going to put ourselves in that position.
So we're still going to be very academic we're still going to be very responsible with our shareholders' cash and it's.
It's just an ongoing we've talked about M&A for quite some time.
We're consistently and constantly looking at it.
No we've gotten down the path on a few deals where we pulled out at the last minute.
And it just didn't make sense for us. So we'll continue to do what we're doing because it makes sense and it's a benefit to you the shareholders and it's a benefit to our employees and we just got to stay disciplined and something will happen.
Understood. Thank you just remind us what your leverage limits or if you do find something big out there.
No we've always thought that we would.
We would go up two three maybe even a little over we could delever that quite quickly.
We're very comfortable with having leverage you know on the one to one on a half. So we went that high we would have to deleverage quite fast.
So obviously, we'd have to have a lot of synergies.
And a lot of benefit on both sides from from a synergistic standpoint from growth. So.
I think we can go we can go up to three maybe a little higher but we you know we're not comfortable doing that it would have to be really a deal that we know short term and long term short term, we can deleverage path to long term, we can grow it fast.
Got it understood. Thank you.
Thank you wouldn't take Mr. David Silver question again, thank you.
Okay. Thanks.
If I had a couple of questions I mean, I think the first one would be on maybe the investment or Capex outlook for 2021. So you know on.
I'm guessing that.
2020 at kind of the.
$30 million level, I mean, I'm thinking that that.
Really kind of on it.
Close to sustaining not not too much growth Capex I'm wondering if you could just.
Give us a quick outlook on where you see capex going in the next year or so and then more to the point if you could maybe call out.
The more important growth or discretionary projects that youre going to be focusing on in 2021.
So Patrick.
First off for that and then you come out of it.
So David in terms of Capex spend.
We spent just show us a $30 million.
In 2020, and our expectation is we said hey, right now is that we'll probably be somewhere between 40 to 45 million Inc.
2021.
There are a couple of projects that we have identified for growth.
They are some further expansions of outperformance chemicals capabilities.
We've got great opportunities organically to grow the business.
And also in our DRA business.
Looking for further expansion of that plant assets.
Demand continues to Phil Philip So these are all good news stories.
As we look out beyond 2021.
We do think that there is an opportunity to accelerate some of the growth in performance chemicals and quad what we're doing at the moment is that we're reviewing.
The five year strategy that and see if we see if we can build a great day capex spend if we can accelerate the growth in that business. So that's something that we might come back.
Later in the year with Apple for now a good number for 'twenty to 'twenty, one remains at 40% to $45 million.
Yeah, I think you've answered the question I think the additional color to put on that is that.
And David it's been expressed in the in the content and express and some of the questions today, but we've also added rail.
We've also kicked off a new technology center in North Carolina for performance chemicals.
So there are some organic projects, but these aren't large large amounts of money on.
And so I think as he touched on the expansion that we've put in place are all organic growth expansion for our current product line and new products line. So.
You know, it's really set up well for the future for what we're doing right now.
And just to build Patrick on that last comment maybe I was.
Too narrowly focused on the Capex line, but with the new technology Center and whatnot.
Might there be a structural increase in your R&D spend.
Along with that.
If there is it's going to be minimal because we've talked about how we do our R&D spend.
But yeah, we will have a little bit increase in R&D spend but it's not gonna be a large number.
Okay.
Last question and apologies.
Apologies in advance I'm I'm, hoping this isn't too sensitive or whatever but.
You know you have a debt free balance sheet Youre building cash.
And you highlight that but you know.
To me, there's potentially another source of liquidity and that would be you know you're overfunded pension.
Pension.
I mean, I haven't seen the 10-K, but I'm guessing just based on the way financial markets have gone.
Over the past 12 months, its probably a bigger surplus than it was 12 months ago.
I'm just wondering if you could characterize you know whether that is an asset that can be.
Tapped either directly or indirectly do do banks look at it and consider it when they're thinking about the size of the revolver or the credit facilities day.
They are willing to extend to you I mean in terms of you know your strategic war chest or your ability to go out and get something done Inorganically I mean, how should we think about that.
You know that.
Pension surplus there thank you.
So David this really.
Next to the United Kingdom pension plan.
That's a plan that's been closed.
Two any accrual for probably at least a decade now.
The company hasn't made any contributions to that plan.
In terms of member contributions for number of years.
We now no longer actually make any contributions for the expenses of running that plant.
Just maybe to explain a little bit about it it's not actually assets of the business.
As a separate legal entity from by a separate board of trustees.
Cause it's a liability that we have in the future to holding up on legally we have to show the assets and liabilities on our balance sheet, what you're likely to see over the next year or two is positioned where the problem whether pension policies actually sold to an insurance company and it no longer appears on our balance sheet. So it's not something.
We can chat as a source of cash is not a cash drain on us we've done a lot of work over the last 15 years to put it into a place where it isn't a cash drain on us and we are now in the final couple of years of being able to.
The deal without a legacy issue from our legacy business.
From a balance sheet.
Yes.
Okay. Thanks for the clarification very clear.
That's it for me. Thank you thanks, David.
Yes.
And there are no further questions at this time please continue.
Thank you all for joining us today, and thanks to all our shareholders customers and inspect employees for your interest and support.
If you have any further questions about inspect on matters discussed today. Please give us a call. We look forward to meeting up with you again and discuss our first quarter in 2021.
And they have a great day.
Thank you that's on the recalls on where today you may all disconnect. Thank you all for participating and have a great day.
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